Date of Submission
Academic Programs and Concentrations
Economics and Finance
Project Advisor 1
Valuation process is at the core of finance. There are several methods that can be used to value a stock. Analysts, due to constraints in time, choose between a few metrics to obtain a target price for the stock. In this paper we analyze the predictive power of different valuation metrics when used to predict the S\&P 500. We do so by first presenting theoretical discussions about the financial markets. The case that EMH is not a good model for finance and that behavioral finance, though useful, does not create a complete picture. Mainstream investment theories presented by Neoclassicals and Neo-Keynesians is argued against and Hymen Minsky's alternate non-equilibrium based interpretation of John Maynard Keynes is explained. Using Minsky's interpretation we explain a market where mis-pricing in stock is a normal phenomenon. The presence of mis-pricing in the market enables our reasoning for using fundamental analysis to identify the mis-pricings. Our results show that using daily data, Price to Sales ratio is the best predictor for the changes in daily returns and Price to Earnings ratio is the best predictor for changes in monthly returns for the S\& P 500.
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Khan, Mohd Ahnaf Habib, "Testing the Predictive Power of Equity Valuation Metrics: A Minskyian Approach" (2016). Senior Projects Spring 2016. 288.